Gross v Empire Healthchoice Assur., Inc.

[*1] Gross v Empire Healthchoice Assur., Inc. 2007 NY Slip Op 51390(U) [16 Misc 3d 1112(A)] Decided on July 18, 2007 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on July 18, 2007
Supreme Court, New York County

Jeffrey M. Gross, M.D. and Union Square Rehabilitation and Sports Medicine, Plaintiffs,

against

Empire Healthchoice Assurance, Inc., Guardian Life Insurance Company of America, Horizon Healthcare of New York, Inc., Healthcare Insurance Plan Of Greater New York, Inc. and Cigna Healthcare of New York, Inc., Defendants.



602848-2005



APPEARANCES:

For Plaintiffs Jeffrey M. Gross, M.D. et al.:

Meiselman, Denlea, Packman, Carton & Eberz P.C.

1311 Mamaroneck Avenue

White Plains, New York 10605

(Jill Owens, Esq., Barry Cepelewicz, Esq.)

For Defendant Empire Healthchoice Assurance Inc.:

Morrison Cohen LLP

909 Third Avenue

New York, New York 10022

(Howard Wolfson, Esq.)

For Defendant Horizon Healthcare of New York, Inc.:

Sills Cummins Epstein & Gross PC

30 Rockefeller Plaza

New York, New York 10112

(Jonathan Jemison, Esq.)

For Defendant Cigna Healthcare of New York, Inc.:

Russo Kean & Toner, LLP

26 Broadway, 28th Floor

New York, New York 10004

(Kevin Horbatiuk, Esq.)

Bernard J. Fried, J.

In a Memorandum Decision and Order dated May 18, 2006, I granted the motion by defendants [*2]Empire Healthchoice Assurance, Inc. ("Empire") and Horizon Healthcare of New York, Inc. ("Horizon") to dismiss all counts of the complaint except for the cause of action for breach of an implied covenant of good faith and fair dealing (the "May 18 Order").

In July 2006, I invited Empire and Horizon to move for reargument on the question of whether my decision to sustain the cause of action for breach of an implied covenant of good faith and fair dealing was in error. They accepted my invitation. At the same time, plaintiffs requested permission, which I granted, to move for reargument of my dismissal of the other counts. Apparently attempting to piggy-back off of the partial success of Horizon and Empire's motions to dismiss, defendant Cigna Healthcare of New York, Inc. ("Cigna") then moved to amend its answer and to join the Empire and Horizon in moving to dismiss the complaint.

Now before me are four motions. (1) a motion by plaintiffs Jeffrey M. Gross, M.D. ("Dr. Gross") and Union Square Rehabilitation and Sports Medicine, seeking leave to reargue my dismissal of the causes of action for account stated, promissory estoppel, negligent misrepresentation, civil conspiracy, and declaratory judgment (Motion Seq. No. 003); (2 and 3) motions by defendants Horizon and Empire for leave to reargue my denial of their motions as to the cause of action for breach of an implied covenant of good faith and fair dealing (respectively, Motion Seq. Nos. 004 and 005); and (4) a motion by Cigna for leave to serve an amended answer and to dismiss the complaint (Motion Seq. No. 006). I have heard oral argument on the first three motions and took the fourth under submission.

C.P.L.R. § 2221(d) provides that a motion to reargue may be made "based upon matters of fact or law allegedly overlooked or misapprehended by the court in determining the prior motion, but shall not include any matters of fact not offered on the prior motion." Such a motion "may be granted only upon a showing that the court overlooked or misapprehended the facts or the law or for some reason mistakenly arrived at its earlier decision." William P. Pahl Equipment Corp. v. Kassis, 182 AD2d 22, 27 (1st Dept. 1992) (internal citations omitted).

For the reasons that follow, and based on the previous Order, which I incorporate by reference into this decision, I grant the motions for leave to reargue by plaintiffs and by defendants Horizon and Empire, but I adhere to the results reached in the May 18 Order for substantially the reasons stated in it. The motion by Cigna to amend its answer is granted, and its motion to dismiss is granted in part and denied in part.

For the sake of readability, I reiterate the salient allegations of the complaint. According to the complaint, in 2002, Dr. Gross became interested in using a newly FDA-approved medical device called the "Sonocur" to administer a treatment called Extracorporeal Shock Wave Therapy ("ESWT") to treat orthopedic conditions. (Compl. ¶¶ 2, 19-20.) Several major health insurers, not defendants, including United Healthcare and AIG, authorized him to bill for ESWT using the billing code typically used for gall bladder and kidney stone treatments, CPT 50590. (Compl. ¶ 21.) Dr. Gross informed the five defendants, also health insurance companies, that these other major health insurers had recommended using that billing code for the use of ESWT.

According to the complaint, plaintiffs contacted defendants to seek pre-approval of ESWT to treat orthopedic conditions and to use the CPT 50590 billing code. Defendants "verbally informed Dr. Gross' practice that they would act similarly to UnitedHealthcare and the other carriers," and Dr. Gross "was led to believe by [defendants] that the 50590 code was the most appropriate." (Compl. ¶¶ 23-24.) Dr. Gross repeatedly asked defendants for written confirmations of their oral approvals, but these requests were "denied." (Compl. ¶ 4.) Nevertheless, for the next three years, Dr. Gross [*3]revised his own authorization forms to memorialize the oral approvals by documenting the names of the defendants' representatives who orally confirmed coverage for ESWT using the CPT 50590 billing code and the dates when those approvals were given. Plaintiffs submitted these forms, along with letters of medical necessity, when they submitted bills requesting payment. (Compl. ¶¶ 24-25.) Plaintiffs' submissions consistently documented that the diagnosis code for which they used ESWT was tendonitis, an orthopedic condition. (Compl. ¶ 69.)

The complaint asserts that defendants typically made payments about six months after plaintiffs submitted their forms. During this time, plaintiffs submitted additional documentation to defendants and spoke with defendants to resolve any pending issues. In some cases, plaintiffs submitted their claims to defendants' internal appeals process, before defendants' appeals departments agreed to pay them. (Compl. ¶¶ 26.) During this time, defendants never told plaintiffs that they should not use the CPT 50590 billing code or that ESWT was unapproved for treatment of orthopedic conditions. (Compl. ¶ 27.)

The complaint alleges that, between late October 2004 and June 2005, six insurers, including all five defendants,[FN1] refused further payments for ESWT, accused Dr. Gross of improper billing and of misrepresenting the medical conditions for which he used the treatment, and demanded the funds totaling over $600,000 that they had paid to him since 2002 for using ESWT to treat orthopedic conditions. (Compl. ¶¶ 28-29.) Empire sent a letter in late October 2004. (Compl. ¶ 34.) Guardian Life Insurance Company of America ("Guardian") followed in January 2005. (Compl. ¶ 40.) Letters from Horizon and Healthcare Insurance Plan of Greater New York, Inc. ("HIP") appeared in March 2005. (Compl. ¶¶ 45, 50.) A letter from Cigna followed in June 2005. (Compl. ¶ 57.)

According to the complaint, Dr. Gross attempted to resolve the disputed claims, providing written documentation and responses to the insurers' demands, but the defendants refused to either respond or withdraw their demands for repayment.[FN2] Meanwhile, Empire and Horizon began to withhold payments on undisputed claims having nothing to do with ESWT, including pre-approved claims. (Compl. ¶¶ 38, 47.) Dr. Gross was forced to stop using ESWT on patients who were unable to afford to pay for them out-of-pocket. (Compl. ¶ 63.)

Plaintiffs filed this complaint on August 5, 2005. In its answer, served on September 27, 2005, Cigna asserted as an affirmative defense that the claims against it are subject to compulsory arbitration. Horizon, in its answer, filed December 5, 2005, asserted a counterclaim in several counts for insurance fraud, breach of contract, unjust enrichment, and negligent misrepresentation, and seeking the return of $95,000 in asserted overpayments. Three months after my May 18 Order, Empire filed its answer, asserting counterclaims in several counts for fraud, breach of contract, specific performance, and unjust enrichment, and demanding the return of $250,000 in alleged [*4]overpayments. Among other things, Empire and Horizon asserted rights arising from provider agreements into which Dr. Gross had allegedly entered with each of them. Cigna filed this motion on August 15, 2006, seeking to amend its answer to withdraw its affirmative defense of compulsory arbitration, to assert counterclaims similar to those asserted by Horizon and Empire, and to dismiss the complaint.

Horizon and Empire's motions to reargue

I address first the question raised in the motions by defendants Horizon and Empire: whether a claim for breach of an implied covenant of good faith and fair dealing is an independent cause of action, or whether dismissal of a breach of contract claim requires the dismissal of the breach of an implied covenant of good faith and fair dealing claim.

In their motions to reargue, Empire and Horizon contend that the claim for breach of an implied covenant of good faith and fair dealing must be dismissed because it cannot stand on its own, in the absence of a valid breach of contract claim.

Plaintiffs have not alleged that defendants breached a specific provision of their provider agreements, but that they breached their duty of good faith and fair dealing by (1) belatedly seeking payment refunds on claims that were previously authorized orally, of which they had notice, and which they had months or years to investigate; (2) withholding payments on false pretenses (with respect to Empire and Horizon); (3) withholding payments on unrelated claims; and (4) doing all of these things in consultation and coordination with each other. In my May 18 Order, I concluded that the complaint properly stated a cause of action for breach of an implied covenant of good faith and fair dealing, and I now affirm that opinion.

The Court of Appeals has expressly recognized that the implied covenant of good faith and fair dealing in an insurance contract encompasses the insurer's duty "to investigate in good faith and pay covered claims." New York Univ. v. Continental Ins. Co., 87 NY2d 308, 318 (1995).

New York courts have repeatedly affirmed that a party may be in breach of an implied duty of good faith and fair dealing, even if it is not in breach of its express contractual obligations, when it exercises a contractual right as part of a scheme to realize gains that the contract implicitly denied or to deprive the other party of the fruit of its bargain. See Dalton v. Educ. Testing Serv., 87 NY2d 384, 389 (1995); Outback/Empire I, Ltd. P'ship v. Kamitis, Inc., 35 AD3d 563, 563 (2d Dept. 2006); Richbell Info. Servs., Inc. v. Jupiter Partners, L.P., 309 AD2d 288, 302-03 (1st Dept. 2003) (refusing to dismiss cause of action for breach of implied covenant of good faith and fair dealing based on the allegation that defendant exercised contractual veto power "for an illegitimate purpose and in bad faith" as part of scheme to deprive plaintiffs of benefits of their joint venture).

The First Department in Maddaloni Jewelers, Inc. v. Rolex Watch U.S.A., Inc. recently confirmed the principle that a claim for breach of the implied covenant of good faith and fair dealing can occasionally stand on its own. - NYS2d , 2007 WL 1774986 (1st Dept. June 21, 2007). In Maddaloni, the defendant had moved on summary judgment to dismiss the plaintiff's third amended complaint, which alleged a cause of action for breach of an implied duty of good faith and fair dealing but did not assert a cause of action for breach of contract. (See Maddaloni Jewelers, Inc. v. Rolex Watch U.S.A., Inc., Index No. 602457/2002, Ruffino Affirm. Ex. 2, 3d Am. Compl. (Apr. 20, 2005).) The First Department sustained the cause of action for breach of an implied duty of good faith and fair dealing. The Court found that, although the parties' contract permitted the defendant to accept plaintiff's orders and time its deliveries at its "discretion," the plaintiff's allegations had "raise[d] a triable issue of fact as to whether [the defendant]'s discretion under the [contract] was [*5]exercised in bad faith." Maddaloni, 2007 WL 1774986, at *1. Maddaloni makes it clear that a plaintiff may bring a cause of action for breach of the implied covenant of good faith and fair dealing alleging that a defendant has exercised its rights under its contract in bad faith in order to realize gains that the contract implicitly denied or to deprive the other party of the fruit of its bargain, even if the plaintiff has not alleged a breach of that contract.

Most of the decisions that appear to reach a contrary result rely on the oft-cited rule that a claim for breach of an implied duty of good faith and fair dealing cannot stand alone if it only substitutes for a nonviable breach of contract claim. Triton Partners LLC v. Prudential Sec. Inc., 301 AD2d 411, 411 (1st Dept. 2003). Accord Jacobs Private Equity, LLC v. 450 Park LLC, 22 AD3d 347, 347-48 (1st Dept. 2005) (good faith claim duplicated insufficient breach of contract claim); Cerberus Int'l, Ltd. v. BancTec, Inc., 16 AD3d 126, 127 (1st Dept. 2005); Parker E. 67th Assocs., L.P. v. Minister, Elders & Deacons of Reformed Protestant Dutch Church, 301 AD2d 453, 454 (1st Dept. 2003). This rule does not bar plaintiffs' good faith claim, where plaintiffs have alleged that defendants acted in bad faith as part of scheme to deny them of the benefit of their bargain.

In Richbell, the First Department acknowledged the "tension between, on the one hand, the imposition of a good faith limitation on the exercise of a contract right and, on the other, the avoidance of using the implied covenant of good faith to create new duties that negate explicit rights under a contract." Richbell, 309 AD2d at 302. But notwithstanding this tension, it upheld the plaintiffs' cause of action for breach of implied covenant of good faith and fair dealing, alleging that the defendant had exercised its contractual right malevolently, for its own gain, as part of a purposeful scheme designed to deprive the plaintiffs of the benefits of their contract. Such a claim "do[es] not create new duties that negate [the party']s explicit rights under a contract, but rather, seek[s] imposition of an entirely proper duty to eschew this type of bad faith targeted malevolence in the guise of business dealings." Id.

In such circumstances, the claim for breach of an implied duty of good faith and fair dealing does not depend on a breach of the contract; therefore, a plaintiff may bring such a claim, whether or not there is a viable breach of contract claim. Chase Manhattan Bank, N.A. v. Keystone Distribs. Inc., 873 F. Supp. 808, 815 (S.D.NY 1994) (under New York law, "[a] party may be in breach of its implied duty of good faith and fair dealing even if it is not in breach of its express contractual obligations," where that party does something to "destroy or injure the right of another party to receive the benefits of the contract").

A few lower court decisions contain statements that, in my view, reflect a short-sighted view of the New York law on this subject. See, e.g., Cohen v. Nassau Educators Fed. Credit Union, 12 Misc 3d 1164(A), 2006 WL 1540324, *4 (Sup. Ct. May 10, 2006) (dismissing cause of action for breach of implied covenant of good faith as duplicative of breach of contract action, and stating that "New York does not recognize a separate cause of action for violation of the implied covenant of good faith and fair dealing"); Silvester v. Time Warner, Inc., 1 Misc 3d 250, 258 (Sup. Ct. 2003), aff'd on other grounds, 14 AD3d 430 (1st Dept. 2005) (dismissing claims for breach of good faith and fair dealing, where no party had "acted in a way to prevent the performance of or the rights under the contract," and stating that covenant of implied covenant of good faith and fair dealing "does not impose any obligation upon a party to the contract beyond what the explicit terms of the contract provide"); Sutton Assocs. v. Lexis-Nexis, 196 Misc 2d 30, 34 (Sup. Ct. 2003) (dismissing cause of action for breach of implied covenant of good faith as duplicative of unavailing fraud theory, and stating that this "duty cannot be used to create independent obligations beyond those agreed upon [*6]and stated in the express language of the contract"). In my view, these statements of law are broader than necessary to the holdings of these decisions and are therefore dicta. To the extent that these statements are necessary to the holdings of these decisions, I decline to follow them, to the extent that they are inconsistent with Dalton, Maddaloni, and Richbell.

Consequently, I adhere to the result reached in the May 18 Order declining to dismiss the cause of action for breach of implied covenant of good faith and fair dealing.

Plaintiffs' motion to reargue

Plaintiffs have also moved to reargue dismissal of five causes of action: account stated, promissory estoppel, negligent misrepresentation, civil conspiracy, and declaratory judgment.

In the account stated cause of action, the complaint seeks to bind defendants by their previous approvals of plaintiffs' claims and to estop them from demanding a refund of asserted overpayments, because they have waited an unreasonably long time to reverse their previous approvals.

An account stated cause of action generally is raised either by a plaintiff creditor seeking to recover from a debtor or as an affirmative defense by a defendant debtor, seeking to prevent the reopening of a paid account. In re Rockefeller Ctr. Props., 272 B.R. 524, 541-42 (Bankr. S.D.NY 2000). Plaintiffs' claim stretches the usual form of this cause of action to fit an unusual set of facts.

To express plaintiffs' argument in the form of a run-of-the-mill cause of action for account stated, it would go as follows: plaintiffs would like to stand in the position of creditors, which, having issued statements of the amounts due on the insurance forms submitted to defendants, having given defendants a reasonable amount of time to object to those statements, and having been paid the amounts stated as due, seek to prevent defendants from challenging the accuracy of those statements.

It is unusual to see medical insurance companies cast in the role of debtors to the physicians who bill them for services provided to their patients. I am not aware of a case in which a similar argument has been made. The question is whether this application of the account stated doctrine is appropriate. It seems to me unwise to extend the doctrine to fit these facts, especially here, where plaintiffs have another viable cause of action that more comfortably fits the facts alleged. Consequently, I adhere to my previous decision dismissing the account stated cause of action.[FN3]

With regard to the promissory estoppel claim: I remain unconvinced that the complaint alleges that plaintiffs reasonably relied on defendants' alleged oral promises by defendants of coverage, where the complaint also alleges that the defendants repeatedly denied plaintiffs' requests to provide written confirmation of those promises. Cf. N.Y.C. Health & Hosps. Corp. v. St. Barnabas Hosp., 10 AD3d 489, 491 (1st Dept. 2004) (viable cause of action for promissory estoppel requires: (1) an oral promise that is sufficiently clear and unambiguous; (2) reasonable reliance on the promise by a party; and (3) injury caused by the reliance). Therefore, I will adhere to my previous dismissal of the promissory estoppel cause of action.

For a similar reason, I also affirm my previous holding dismissing the negligent misrepresentation [*7]claim.

"A claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information." J.A.O. Acquisition Corp. v. Stavitsky, 8 NY3d 144, 148 (2007).

Applying these criteria to the present case: defendants have conceded that Dr. Gross entered into provider agreements with them. Consequently, he is in privity of contract with each of them, so the first criterion is met. Defendants concede that any alleged oral approvals were incorrect, so the second criterion is met. Plaintiffs have failed to satisfy the third criterion, however, because it was unreasonable for plaintiffs to rely on defendants' alleged oral approvals of the CPT 50590 billing code to use ESWT to treat orthopedic conditions, after defendants "refused" to confirm the oral approvals in writing, despite Dr. Gross's "repeated" requests. (Compl. ¶¶ 23-24.) Therefore, I properly dismissed the cause of action for negligent misrepresentation.

With regard to the cause of action for civil conspiracy: Under New York law, where a plaintiff has failed to sufficiently allege an actionable underlying tort, there is no support for conspiracy allegations. Am. Preferred Prescription, Inc. v. Health Mgmt., Inc., 252 AD2d 414, 416 (1st Dept. 1998). Consequently, because no cause of action for tort has survived dismissal, I correctly dismissed the cause of action for civil conspiracy.

Finally, I conclude that I properly dismissed plaintiffs' cause of action seeking a declaratory judgment. "A cause of action for a declaratory judgment is unnecessary and inappropriate when the plaintiff has an adequate, alternative remedy in another form of action, such as breach of contract." Apple Records, Inc. v. Capitol Records, Inc., 137 AD2d 50, 54 (1st Dept. 1988); accord Artech Info. Sys., L.L.C. v. Tee, 280 AD2d 117, 125 (1st Dept. 2001) (affirming dismissal of cause of action for declaratory judgment, where first cause of action for breach of contract afforded plaintiff an adequate remedy). Since, in this case, plaintiffs have an adequate, alternative remedy in their cause of action for breach of implied contract of good faith and fair dealing, the cause of action for declaratory judgment is unnecessary. Therefore, I affirm my original decision dismissing this cause of action.

Cigna's Motion to Amend and Dismiss

Cigna's motion is unopposed insofar as it seeks leave to amend its answer and to dismiss counts five, seven, and nine of the complaint. These aspects of its motion are therefore granted on default. In light of my decision directing plaintiffs to file an amended complaint, Cigna shall file an answer in response to the amended complaint, rather than filing an amended answer in response to the original complaint.

The rest of Cigna's motion to dismiss tracks the parallel motions by Horizon and Empire, and plaintiffs oppose it for all the same reasons that they opposed Horizon and Empire's motions to dismiss and to reargue. For the reasons discussed, supra in connection with Horizon and Empire's motions, I deny Cigna's motion to dismiss the cause of action for breach of implied covenant of good faith and fair dealing, but grant its motion to dismiss the remaining causes of action in the complaint.

Accordingly it is

ORDERED that plaintiffs' motion for leave to reargue (Motion Seq. No. 003) is granted, but I adhere to the holdings in the May 18 Order for the reasons discussed in this memorandum decision; and it is further

ORDERED that defendants Horizon and Empire's motions for leave to reargue (Motion Seq. Nos. [*8]004 and 005) are granted, though I adhere to my holdings in the May 18 Order for the reasons discussed in this memorandum decision; and it is further

ORDERED that Cigna's motion for leave to serve an amended answer and to dismiss the complaint (Motion Seq. No. 006) is granted in part and denied in part, in accordance with this memorandum decision; and it is further

ORDERED that plaintiffs shall file an amended complaint in accordance with this decision within 30 days of the service of a copy of this order with notice of entry, and it is further

ORDERED that discovery, which has been stayed pending my decision on these motions, shall now continue with respect to the remaining claims; and it is further

ORDERED that the parties shall appear in court for a status conference at 11:00 a.m. on September 25, 2007.

DATED:_____________________________

J.S.C. Footnotes

Footnote 1:

The sixth insurer, according to the complaint, was GHI, which subsequently withdrew its demand for repayment after plaintiffs submitted documentation that GHI had already approved the use of ESWT and the billing code plaintiffs used to bill for it. (Compl. ¶ 28.)

Footnote 2:Since the complaint was filed, the Court has been informed that the action has been discontinued against two of the defendants, HIP and Guardian. So the term "defendants" in this decision applies only to the remaining defendants: Empire, Horizon, and Cigna.

Footnote 3:In their motion to reargue, plaintiffs also contend that I improperly dismissed this claim based on the erroneous assertion that defendants had not made legal claims for refunds. Plaintiffs base this contention first on the complaint's allegation that defendants had made written demands for refunds, and second on the fact that Empire and Horizon filed counterclaims demanding refunds of the alleged overpayments. Because I conclude that I correctly dismissed this cause of action on another ground, I do not need to address plaintiffs' contention.